New Economic Tack for Brazil (fwd)

[Robert Weissman <rob@essential.org>]

          January 15, 1999

          New Economic Tack for Brazil

          RIO DE JANEIRO, Brazil (AP) -- The Brazilian currency devaluation
          that stunned world markets is an idea that has been growing for
months.
          Its completion may enable financial and political leaders to
change the
          course of Latin America's largest economy. 

          The Central Bank took another step on that course today, removing
all
          restrictions on dollar trading until Monday, when it promised to
release
          new rules. 

          The Brazilian currency, the real, immediately tumbled from the
upper limit
          of 1.32 to the dollar to 1.55, before strengthening slightly. 

          Some economists speculated that the bank could be testing the
waters to
          see what level the real would reach before setting a new band, or
could
          even let the real float freely. 

          The Sao Paulo Stock Exchange, Latin America's largest,
immediately shot
          up after six straight days of losses. Two hours after opening,
the Bovespa
          index was up 18.4 percent. 

          Hints that Brazil was considering major changes in economic policies
          came as early as President Fernando Henrique Cardoso's Jan. 1
          inauguration speech. 

          ``I do not call myself lord of a single path. I am ready to
debate and
          rectify the course,'' Cardoso said as he took office for a second
four-year
          term. 

          Within his government, a tug-of-war was already under way for
control of
          the Real Plan, the 1994 economic program that tamed 2,700 percent
          inflation and propelled Cardoso to the presidency. 

          One faction favored high interest rates to attract dollars,
keeping the
          Brazilian currency, the real, strong, and inflation low. Its
champions were
          Finance Minister Pedro Malan and Central Bank chief Gustavo Franco,
          who resigned Wednesday. 

          On the other side were the ``developmentalists,'' who wanted to
lower
          interest rates and loosen the straitjacket on the real, even if
it meant
          reheating prices. As the economy spun toward recession, it won
support
          from an unlikely alliance of labor unions and big business. 

          Workers blamed high interest rates for a rise in official
unemployment to a
          record 8 percent -- and a predicted 12 percent in 1999. Businessmen
          said high interest rates were strangling the economy -- car sales
were
          down 28 percent last year from 1997 -- and clamored for Franco's
head.

          Even the government was a victim of its own policy: Interest
rates were
          the main reason the spending deficit shot up to about $65
billion, or nearly
          8 percent of Brazil's gross national product. 

          On Wednesday, Franco capitulated. 

          ``I would never think of being an obstacle to the natural
redirection of
          interest rates and foreign exchange policy, as the president
desires,''
          Franco said in his farewell speech. 

          His replacement, former Central Bank monetary policy chief Francisco
          Lopes, said the goal of the effective 7.6 percent devaluation was
to lower
          interest rates, now at nearly 30 percent. 

          ``The change in exchange policy was in the works for some time,''
said
          Rodrigo Barros, a trader at Banco Cidade in Sao Paulo. 

          The devaluation will make Brazilian exports cheaper and hopefully
reduce
          the trade deficit, which was $6.3 billion last year. 


          The government also is likely to drop Franco's
``slow-and-steady'' policy,
          which has sought to attract investors by touting Brazil's
predictability.
          Since the Asian crisis, little is predictable. 

          The question now is what will happen to inflation, the scourge of
the
          Brazilian economy for decades. Prices rose less than 2 percent
last year,
          according to most indexes, and the University of Sao Paulo recorded
          deflation in the nation's biggest city. 

          With more money in the economy, inflation is sure to restart. But
public
          opinion polls taken before last October's elections showed many
          Brazilians were more worried about jobs than inflation. 

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